Academic journal article Federal Reserve Bulletin

New Information on Lending to Small Businesses and Small Firms: The 1996 CRA Data

Academic journal article Federal Reserve Bulletin

New Information on Lending to Small Businesses and Small Firms: The 1996 CRA Data

Article excerpt

Raphael W. Bostic and Glenn B. Canner, of the Board's Division of Research and Statistics, prepared this article. Sheryl L. Hudson and John E. Matson provided research assistance.

The Community Reinvestment Act (CRA) of 1977 is intended to encourage commercial banks and savings associations to help meet the credit needs of their local communities in a manner consistent with safe and sound banking practices. As a consequence of recent revisions to the regulations that implement the CRA, new information is now publicly available on the geographic distribution of small loans to businesses and farms and on community development lending. Because small businesses and small farms are more likely than larger ones to borrow small amounts, the CRA data on small loans are likely to provide a reasonable measure of the extension of credit to such businesses (and hence, in this article, inferences about lending to small businesses and small farms are based on data on small loans).

The new CRA data, combined with information reported by institutions about the geographic areas that constitute their local communities, enable lenders, supervisory agencies, and members of the public to better assess the performance of these institutions in meeting their CRA obligations. Just as the availability of credit to purchase, refinance, and improve homes is critical to the well-being of local communities, so is the availability of credit for small businesses and small farms. The new CRA data thus complement information made available pursuant to the Home Mortgage Disclosure Act (HMDA) about the flow of housing-related credit to communities nationwide.(1) The CRA data also provide new opportunities to gauge the flow of credit to communities with differing economic and demographic characteristics.

Although intended primarily to facilitate assessments of performance under the CRA, the data on small business and small farm lending are likely to be used in other ways as well. For example, lending institutions may use the data to help evaluate the effectiveness of products and services and to calculate their share of the small business loan market in a given geographic area. Similarly, the federal agencies charged with enforcing the nation's antitrust laws may use the CRA data in assessing the competitive effects of bank mergers and acquisitions.

This article presents an initial assessment of the new CRA data on originations and purchases of small business and small farm loans during 1996. It is mainly intended to provide a description of the depth and breadth of the data and to place the information in the context in which it will be used for CRA and other regulatory enforcement activities. The focus of the analysis is on the broad patterns that emerge when the data are reviewed from a national perspective rather than on the lending activities of any individual institution. The article also discusses some of the important limitations of the data and challenges that arise in using this new information.

For 1996, we find that nearly 2,100 large commercial banks and savings associations (savings banks and savings and loan associations) reported data on their small business, small farm, and community development lending and on the geographic areas that constitute their local communities.(2) While they account for only 18 percent of all commercial banks and savings associations, the CRA reporters extend about two-thirds of all small business loans and about one-fifth of all small farm loans granted by such institutions. Of the CRA reporters that extended loans, the most active 1 percent granted a large proportion (nearly half) of the small business loans and 13 percent of the small farm loans.

Like the number of businesses and farms, the distribution of lending to small businesses and small farms varies geographically. Most small business loans are extended in central city and suburban areas; most small farm loans, not surprisingly, are in rural areas. …

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